The Paris climate agreement failed to have the desired impact on the European carbon market. Prices have fallen on the EU’s Emissions Trading System (EU ETS) since the agreement was signed in December. EURACTIV France reports.

The price of European Emissions Allowances (EUA), a carbon quota system used by 12,000 industrial sites, fell to €7.60 per tonne of CO2 on Thursday (7 January), its lowest level in six months. Before COP21, the price was €8.60.

This was not how it was supposed to be. After two weeks of negotiations last December, representatives from 190 countries signed a deal to halt the progression of CO2 emissions.

Many heads of state and business leaders have repeated calls to set a carbon price, and a number of governments committed to ambitious carbon market and pricing policies.

“The Paris agreement can only give a general feeling to the market, and this feeling is largely positive. But the decisions that have been taken concern the post-2020 period, and the market works in the short term,” explained Andrei Marcu, the head of the Carbon Market Forum at the think tank CEPS.

Energy prices have dropped sharply since COP21. Gas and electricity prices have fallen across Europe, and the price of oil has fallen by almost $10 a barrel. But the evolution of the carbon quota price is closely linked to the cost differential between gas and coal: lower gas prices make it a more attractive fuel for generating electricity, rather than burning coal, requires energy companies to buy more carbon quotas.

And the exceptionally mild winter we are experiencing in the northern hemisphere has also played a role in bringing down energy prices, by cutting the demand for heating.

Uncertainty over the market stability reserve

The carbon market’s woes have been compounded by a climate of legal uncertainty. On 30 December 2015, Poland announced its intention to take the European Commission to court over its plans to introduce a market stability reserve to the EU ETS.

The aim of this mechanism is to push up the carbon price by temporarily removing quotas from the market. But the new Polish government, which seems determined to become fully dependent on coal, has strongly objected. This decision will cause friction with many other EU member states, which are actively trying to reduce their dependence on coal.

But the idea of a legal challenge, which has yet to be lodged by the country, could further destabilise the market, according to the Court of Justice of the EU. If the market stability reserve was compromised, the supply of quotas would be more abundant, and prices would fall further.

Background

The European Union Emissions Trading System (EU ETS) was brought into action on 1 January 2005. It was conceived to help reach the Kyoto Protocol objective of reducing greenhouse gas emissions by 8% by 2012, using emissions limits for energy-intensive industries like steel, cement and electrical generation.

The EU ETS allows member states to distribute CO2 emissions quotas to authorised industries. These industries can then exchange the pollution permits amongst themselves, on the condition that they respect their own national emissions limits.

The revised directive, adopted under the 2008 climate and energy legislative package, changed the ETS from a system of free allocations to an auction for the electrical industry in 2013.

Certain exceptions were made for high-energy industries with strong international competition, such as steel. Increased costs in Europe could lead to the sector leaving the continent altogether.